I’ve heard a lot recently about rents increasing and that this will shore up housing prices. The overlooked apsect of this is that, although housing prices do not figure into the inflation statistics used by the Fed to set interest rates, rents do. I believe that rent makes up fully one third of the CPI. If rents increase at anywhere near the rate some folks are projecting, it will send the CPI through the roof and force the Fed to continue tightening. And continued tightening in this environment would almost certainly push housing over the edge. When all those ARMs reset, an unprecedented wave of forclosures would likely result, further depressing housing prices. I think this is why the Fed is in a no win situation. The baseless increases in asset valuation, which were ignored because they weren’t statistically accounted for, are now inevitably filtering down into the core inflation statistics. People stuck with negative cash flow properties are trying to recoup their investment by increasing rents. On the other hand, if the Fed continues with easy money policies, inflation will undoubtedly become a significant issue.
